TARP Panel Report Cites Regulatory Failures In Crisis

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The Congressionally-appointed panel overseeing the TARP program today will release a stinging report of the regulatory failures that led to the current financial crisis.

A copy of the draft report, which will be presented to Congress, was obtained by CNBC.com.

“The regulatory system not only failed to manage risk, but also failed to require disclosure of risk through sufficient transparency,” the report concludes.

Among the report’s recommendations are that future regulation include better oversight of systemic risk, reducing the potential impact of “too-big-to-fail” institutions; improved transparency through “better, more accurate credit ratings” and better regulation of consumer products, which would “curb excesses in mortgage lending.”

The panel was created under the Economic Emergency Stabilization Act, which was signed into law in October and authorized the Treasury to spend up to $700 billion in propping up the financial system.

The panel, known as COP (Congressional Oversight Panel), is headed by Harvard University professor Elizabeth Warren, who has been consistently critical of the TARP program’s administration under former Treasury Secretary Henry Paulson.

The 78-page report includes so-called “alternate views” from one panel member, which include making the Federal Reserve the “systemic regulator.”

The COP report also identifies three “highly technical issues” that have had a key role in the regulatory structure that need serious review by the agencies with oversight: accounting rules, securitization of debt and short selling. The report says COP also plans to “address financial architecture” in a future report.

The findings of the five-member panel have sometimes been split along party lines, given Warren and two other members were appointed by Congressional Democrats. The two Republican members are Rep Jeb Hensarling (Texas) and former New Hampshire Senator John E. Sununu.

CNBC.com has also obtained a copy of the joint dissenting views of Hensarling and Sununu. Though there is considerable overlap in the findings, their report places great emphasis on the failure to “consolidate, strengthen and increase regulatory oversight of Fannie [Mae} and Freddie {Mac],” the two government supported mortgage companies that were taken over by federal regulators late last year.

Their recommendations include reforming the mortgage financing system, through less government intervention in the housing market by entities like Fannie and Freddie, as well as improved origination and disclosure standards

Hensarling and Sununu also call for the merger of the Securities and Exchange Commission and the Committee Futures Trading Commission.

The reports are expected to released at 9:30 a.m. ET. It's unclear what commiittee(s) they'll be presented to, but given the House Financial Services Committee's portfolio, it is one likely candidate.